May 5, 2017
An Overview
Summary: The National Flood Insurance Program (NFIP), created by the National Flood Insurance Act (NFIA) of 1968 and administered by the Federal Emergency Management Agency (FEMA), was put in place to provide flood insurance to eligible insureds. Following is an overview of the background, rules, and rating of the program, as well as a brief discussion of recent related legislature and case law.
Topics covered: Increased need for flood insurance
The end of the past century has seen the population of the United States continue to shift from the interior to the coast. Coastal counties constitute only 17 percent of the total land area of the United States (not including Alaska ), but account for 53 percent of the total population. This ratio of coastal county population to the population of the United States as a whole has remained relatively stable (between approximately 52 and 54 percent) since 1970. Coastal county population is not growing significantly faster than noncoastal population, but rather, it is the continued population growth in the limited land area of coastal counties that is of growing importance and the focus of increasing attention.
The United States contains some 673 counties designated as coastal, which means that at least 15 percent of their land area is in a coastal watershed. There are 285 counties in the Atlantic, 142 in the Gulf of Mexico, 87 in the Pacific, 158 in the Great Lakes. In 1990 this accounted for 54 percent of the population. In 2003 roughly 153 million people lived in coastal counties. That number was expected to rise by 12 million people by 2015. As the population ages and more retirees move to warmer climates, it is likely that growth in coastal areas will continue and probably increase. This does not include the interior areas that are subject to stream and river flooding. The 2010 census indicated that 39 percent of the population live in counties that are apt to receive significant coastal flooding in the event of a 1 percent annual chance flood event, commonly called a 100 year flood. These areas are known as Special flood Hazard Areas (SFHA).With sea levels predicted to rise, the risk of flooding will continue to grow.
Not only has this resulted in an increased need for flood insurance, but it has also resulted in the fact that buildings that are consistently flooded are the subject of special focus. The federal government has had to step in to encourage those homeowners who repeatedly file claims to relocate. Currently, of particular concern are regular losses to the same properties. These are the repetitive loss properties that have been eligible for reduced premiums and have been flooded on more than one occasion. Some of the buildings have sustained two or more losses where the total amount paid equaled or exceeded the property value. Rather than continuing to pay these claims, the Federal Emergency Management Agency (FEMA) is focusing on loss prevention. Property owners are being offered financial assistance to elevate or, in some cases, move. In some instances, communities are buying and demolishing the at-risk properties. Those policy holders refusing help are being asked to pay full premium, which for a repetitive loss property could be substantial.
The Repetitive Flood Claims (RFC) and the Severe Repetitive Loss (SRL) grant programs were authorized by the Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004 (P.L. 108–264), which amended the National Flood Insurance Act (NFIA) of 1968. These programs authorize FEMA to provide funds to assist states and communities in reducing flood damages to insured properties that have had one or more claims under the NFIP, and to reduce or eliminate the long-term risk of flood damage to severe repetitive loss structures insured under the NFIP. The properties must be in a state or community that participates in the NFIP but cannot meet the requirements of the Flood Mitigation Assistance program because they either are unable to provide the non-federal cost share, or do not have the capacity to manage the activities.
The Flood Mitigation Assistance program provides funding to states, territories, federally-recognized tribes and communities for projects that reduce or eliminate the long-term risk of flood damage to insured properties.
In order to meet the Severe Repetitive Loss (SRL) designation, the property must be insured under the NFIP and have incurred losses that had one of two results. Either there were four or more flood insurance claim payments exceeding $5,000 or more, with two payments occurring within a ten year period, and with total claims exceeding $20,000, or two or more flood insurance claims payments that together exceeded the value of the property.
For example, from 2000 to 2016 a property sustained 4 separate flood claims, with claims of $6,000, $5,000, $8,000 and $7,000 but two of those claims occurred between 2006 and 2016. This totals $26,000. Even if the two claims within ten years did not total $20,000, as long as all four claims totaled over $20,000 and each claim was over $5,000 then the property meets the requirements of SRL.
Or, a property valued at $250,000 sustains two large losses with one loss being $175,000 and the other loss being $150,000 would qualify for the SRL designation. Once a property is so designated the property can be acquired for demolition or relocation of the structure, with the deed being restricted to vacant land for open space uses in perpetuity.
|Background of the National Flood Insurance Program
Flood insurance, while not generally written on a direct basis by private insurers, is widely available through the NFIP. The original program, created by the National Flood Insurance Act of 1968, was amended by the Flood Disaster Protection Act of 1973, which introduced a mandatory element into the program and broadened the amount of coverage available to eligible insureds.
The program was amended again by the National Flood Insurance Reform Act of 1994, which required, among other things, that federally insured or regulated lenders must notify borrowers or lessees that the property is located in a special flood hazard area and that flood insurance is required. Flood insurance coverage for the cost of complying with floodplain management building regulations was provided in the Act.
Coverage can be purchased through any licensed property and casualty insurance agent and also through some private insurance companies cooperating in the NFIP's "Write-Your-Own" program (see following section). As of the end of December 2006 there were 5,517,089 policies in force. That number had dropped over 10 years and as of 2016 there are 5,081,470 policies in force. Total dollar claims for the year 2006 were $553 million. In 2005 loss payments totaled $17.4 billion, the highest amount on record, including losses from hurricanes Katrina, Rita and Wilma. In 2016 losses totaled $3,693,244 billion. In 2013 the average premium was $625. The average flood claim in 2013 was $30,000.
The NFIP is a federal program administered by the Federal Insurance and Mitigation Administration (changed from the Federal Insurance Administration), which is part of FEMA. This program enables property owners to purchase flood insurance. This insurance is designed to provide an insurance alternative to disaster assistance to meet the escalating costs of repairing damage to buildings and their contents caused by floods.
It should be noted that disaster assistance is not automatically available. The President must declare a major disaster before most forms of assistance are offered. A governor may determine, after consulting with local government officials, that the recovery appears to be beyond the combined resources of both the state and local governments and that federal assistance may be needed. In requesting supplemental Federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. §§ 5121-5206, the governor must seek a presidential declaration by submitting a written request to the President through the FEMA regional office. In this request the Governor certifies that the combined local, county and state resources are insufficient and that the situation is beyond their recovery capabilities. Following a FEMA regional and national office review of the request and the findings of the preliminary damage assessment, FEMA provides the President an analysis of the situation and a recommended course of action.
The NFIP is based on an agreement between local communities and the federal government that states that if a community will implement measures to reduce future flood risks to new construction in special flood hazard areas (SFHAs), the federal government will make flood insurance available within the community as a financial protection against flood losses that do occur. The NFIP is also charged with mapping the nation's floodplains. The resulting rate maps are referred to as FIRMS—flood insurance rate maps. The 1968 Act allowed rates of buildings built or substantially improved prior to the effective date of a community's initial FIRM or December 31, 1974, whichever was earlier, to be subsidized by the federal government. These buildings are referred to as pre-FIRM. The rates for those buildings built or substantially improved after the effective date of a FIRM or December 31, 1974, whichever is later, are post-FIRM and are not subsidized. Rate maps are continuously reviewed as they must be done by area, and a community can ask for a change in status. Information on changes can be found here: https://www.fema.gov/status-map-change-requests
Flood insurance can be written only in those communities that have been designated as eligible by FEMA. An eligible community is one that has been notified by FEMA that it contains flood prone areas. While unincorporated areas in an approved county are eligible, incorporated communities in that county may not be. Incorporated villages or towns must obtain their eligibility independently of the county.
Once notified, a community must make prompt application to join the program and indicate a willingness to set up and enforce floodplain management standards aimed at avoiding and reducing future flood damage. Only communities with flood problems that have not as yet been notified may also join the program by making application to FEMA and expressing a willingness to institute the required floodplain management measures.
In the event a community with a potential flood hazard does not enter the program, it will eventually be notified by FEMA that it is flood prone, nevertheless. This notification takes the form of a Flood Hazard Boundary Map (FHBM) published by FEMA that shows the areas subject to severe flooding within the community. Upon receipt of such notification, the community has one year in which to enter the program. Once the community expresses its willingness to institute floodplain management measures, members of the community become eligible for insurance.
If a community chooses not to participate, there are ramifications. Grants, loans, or guarantees made by federal agencies such as the FHA are prohibited for acquisition or construction of property. Lending institutions insured or regulated by a federal agency may make conventional loans, but generally will avoid doing so because of the risk involved should their accounts be audited. Further, no federal assistance for acquisition or construction will be provided if a flood occurs, nor will assistance for housing and personal property be available. No one can purchase flood insurance in a nonparticipating community.
In 1983 the federal government began the "Write Your Own" ( WYO ) program to encourage private insurers to participate in the NFIP. Prior to that time, flood policy sales did not achieve the hoped-for amount. By using private carriers, particularly their marketing and customer data bases, policy count and geographic distribution increased. In 2006 there were 101 insurance companies participating in the "Write-Your-Own" Program. Thirty-one of these companies are participating in the Mortgage Portfolio Protection Program (MPPP). The MPPP was created in 1991 to assist mortgage lenders bring their portfolios in compliance with the flood insurance requirements of the Flood Disaster Protection Act of 1973. The MPPP allows a mortgagee to obtain the required flood insurance on a property that after origination is discovered to be lacking flood coverage. The MPPP is also allowed only in conjunction with reviews of mortgage portfolios by lenders and servicing companies.
Under the "Write Your Own" program, a participating company sells flood policies under its own name, collects premiums, keeps a stipulated percentage of the premium to cover operating expenses and commissions, and invests the remainder. The insurer is then responsible for servicing the policies and adjusting losses and paying claims. The federal government retains responsibility for any underwriting losses.
The NFIP program consists of three forms. There is the dwelling form, used with one-to four-family dwellings and eligible manufactured housing. It is also used to insure a unit within a residential condo building. The residential condominium building association policy (RCBAP) is used to insure residential condos (and commonly-owned contents) not in the Emergency Program. Seventy-five percent or more of the total floor area must be for residential use. Finally, the general property form is used for commercial establishments, residential condos in the Emergency Program, timeshare buildings not in the condo style of ownership, and cooperative buildings.
The chief difference among the forms is that the dwelling form and RCBAP allow replacement cost, while the general property form settles loss strictly on an actual cash value basis.
Flood insurance may be written on most types of residential or nonresidential buildings located in an eligible community, provided they (1) have two or more exterior rigid walls; (2) are roofed; (3) and are principally above ground (meaning at least 51 percent of its actual cash value, including machinery and equipment, is above ground level). Contents of eligible buildings are also eligible for coverage. However, if contents are located in eligible buildings that do not have rigid walls on all sides, the contents must be secured to prevent flotation out of the building during flooding. The only appurtenant structure eligible for coverage is a garage under the dwelling form; other appurtenant structures must be written on separate policies. Blanket insurance is not allowed, although from two to ten buildings may be scheduled on the general property form so long as they have the same ownership and the same location, or are located on contiguous properties.
A mobile home (referred to in the manual and in the coverage forms as manufactured housing) is eligible for flood insurance only if it is (1) on a permanent foundation and (2) anchored to a permanent site if located in a SFHA. Anchoring entails over-the-top or frame ties to ground anchors, or in accordance with the manufacturer's specifications, or in accordance with the community floodplain management requirements. Mobile homes insured continuously since September 30, 1982, can be renewed under previously existing requirements if affixed to a permanent foundation. Travel trailers are now eligible as mobile homes if they have been anchored to a foundation and their wheels removed. Residential one-to four-family buildings and individual residential condo units written on the dwelling form are eligible for up to $250,000 in building coverage and $100,000 personal property coverage.
Residential condominium buildings and contents are likewise eligible, with the special provision that if a condominium unit owners association does not have adequate flood insurance, a unit owner may (often at the insistence of a mortgagee) purchase insurance for the contents and the unit. A residential condominium building not in the emergency program may be insured on the RCBAP, as noted above. The limit of coverage for the building is the replacement cost or number of units times $250,000, whichever is less; for commonly-owned contents, the limit is a maximum of $100,000. A residential condo building in the emergency program must be insured on the general property form, with a limit of $100,000 on the building and $10,000 on the commonly-owned contents.
Cooperative residential buildings can currently be insured for a maximum building coverage of $250,000 on the general property form. Time share buildings not in the condominium form of ownership, where at least 75 percent of the area is used for residential purposes, can also be insured for a maximum of $250,000 on the general property form. Timeshare buildings in the condominium form of ownership are eligible for coverage to the maximum currently allowed in the RCBAP program (replacement cost or number of units times $250,000). A residential building containing more than four units, other than those previously noted, may be insured on the general property form. Coverage is limited to $250,000 on the building and $100,000 on contents.
Newly constructed or substantially improved buildings that have floors partially over water, except for pre-FIRM buildings, must be submitted for an underwriting decision and rating, with the likelihood of very high rates. However, pre-FIRM buildings constructed or substantially improved prior to October 1, 1982, and partially over water are eligible for normal pre-FIRM rates. Boathouses located partially over water—that is, the nonboathouse portions—are eligible if the building is partially over land, and also used for residential, commercial, or municipal purposes.
Newly constructed or substantially improved buildings located entirely in or on water or seaward of mean high tide are not eligible. Post-FIRM buildings constructed prior to October 1, 1982 and entirely over water must be submitted for an underwriting decision and rate.
Silos, grain storage buildings, and cisterns, even if they are of container type construction, are eligible, but other container type structures are not. Examples of the excluded types of containers are gas and liquid tanks, chemical or reactor container tanks or enclosures, brick kilns, and similar units and their contents. The contents of silos, grain storage buildings, and cisterns are insurable. Commercial contents are insurable except for contents located in an ineligible structure or in a building not fully walled. Bailees' customer goods and stock consisting of automobiles, motorcycles, or motorized equipment are not eligible for coverage.
Buildings in the course of construction (builder's risks) can be provided flood insurance for the benefit of the owner, builder, or mortgagee. However, there are conditions. The amount of the deductible for each loss occurrence before the building is walled and roofed is twice that selected to apply after the building is walled and roofed. There is no coverage until a building is walled and roofed where the lowest floor, including basement floor, of a nonelevated building or the lowest floor of an elevated building is below the base flood elevation in Zones AH, AE or A1-30, AR, AR/AE, AR/AH, AR/A1-A30, AR/A, AR/AO, or is below the base flood elevation adjusted to include the effect of wave action in Zones VE or V1-30. Materials and supplies to be used in construction are not covered unless contained within an enclosed building either on the premises or adjacent to the premises.
Eligibility rules, as well as all other policy writing rules and rating information, are contained in full in the flood insurance manual. The manual, application forms, maps, and other supplies, are available at http://www.fema.gov.
Certain buildings and their contents located within areas designated as coastal barriers or otherwise protected areas under the Coastal Barrier Resources Act of 1982 and the Coastal Barrier Improvement Act of 1990 may not be eligible for coverage. The laws were enacted as a means of discouraging development in high-risk areas. Only buildings constructed before the dates established by the Act remain eligible for federal flood insurance.
Buildings constructed prior to October 1, 1983, and not substantially improved or damaged after that date are eligible under the 1982 Act. Eligibility under the 1990 act requires that, for coastal barrier resource systems areas, a building's start of construction be prior to November 16, 1990, and that it not have been substantially improved or damaged after that date. For otherwise protected areas, buildings built prior to November 16, 1991 and not substantially damaged or improved after that date, or buildings used in a manner consistent with the purpose for which the area is protected, regardless of the construction date, are eligible. If a policy has been mistakenly issued to a nonqualified building any loss will be denied, the policy canceled, and the premium refunded. The flood manual contains a list of communities where coastal barriers or otherwise protected areas have been identified.
There are many rules, found in the flood manual, governing the waiting period, that is, the time between the application date and the date of acceptance. There is a standard thirty-day waiting period for new applications and for endorsements to increase coverage. For most new policies, the effective date will be 12:01 A.M., local time, on the thirtieth calendar day after the application date and the presentment of premium, which must accompany the application. There are numerous exceptions. First are new policies written in connection with making, increasing, extending, or renewing a loan. These are effective at the time of the loan closing, providing application is made and premium presented at or prior to the closing. Second are new policies in connection with mortgage portfolio reviews. (The Mortgage Portfolio Protection Program is designed to help lending institutions comply with the Flood Disaster Protection Act of 1973, as amended. Policies written through the MPPP are placed with WYO companies only.) Third are new policies written when the purchase of flood insurance is in connection with the revision or updating of a FHBM or FIRM. Finally, new policies written on a submit-for-rate basis are effective at 12:01 A.M. local time on the thirtieth calendar day after the presentment of premium, with three exceptions: in connection with a loan, when the lender determines that a property that did not have flood coverage should have it, and during the thirteen month period beginning on the effective day of a map revision.
If a community is just entering the program, or is converting from the emergency to the regular program, the above rules and exceptions apply. Generally, endorsements requesting a new coverage or an increase in limits are effective 12:01 A.M. local time on the thirtieth calendar day following the date of endorsement and the presentment of additional premium. This thirty day waiting period does not apply when the additional amount of insurance is requested in connection with a loan, such as a second mortgage, home equity loan, or refinancing. The increase is effective at the time of closing, provided the increase is applied for and the additional premium presented prior to or at the closing. The other exception is during the thirteen month period beginning on the effective date of a map revision, when the FIRM is revised to show the building is in a special flood hazard area when it had not been in the flood hazard area.
The Emergency Program was set up when it became clear that it would take longer to properly identify, map, and establish rates for floodplain areas than initially anticipated. Prior to the Program's establishment, communities had to have been mapped and have flood-risk zones in place before they could participate in the NFIP. The Emergency Program, where limited, Federally-subsidized coverage is available, allows a community time for the Flood Insurance Study that will eventually determine rates.
There are many references throughout the flood manual and in informational materials from FEMA about the one hundred year, 1 percent, or base flood. This is simply a standard that has been set—a benchmark, if you will—to measure the chance of flooding in any given area. According to The National Flood Insurance Program Description (FEMA, 2007), "The 1-percent-annual- chance flood (or 100 year flood) represents a magnitude and frequency that has a statistical probability of being equaled or exceeded in any given year, or stated alternatively, the 100-year flood has a 26 percent (or 1 in 4) chance or occurring over the life of a 30-year mortgage."
FEMA is required to notify all communities that have one or more areas containing special flood hazards. It publishes a FHBM that shows the areas subject to flooding within these communities. The map is issued with a community number that identifies the particular community. It is possible that many communities will not, at the time of numbering, be actually participating in the Emergency Program. A community may become eligible for the Emergency Program before the actual distribution of the map by completing an application to FEMA. Agents are responsible for determining whether a community is eligible and for obtaining the community identification number before they attempt to sell flood insurance. Local communities maintain a copy of the map; additionally, this information is available at http://www.fema.gov.
The FHBM is used until publication of the FEMA FIRM. Until a community enters the regular program only limited coverage is available. The second map issued by FEMA is actually the product of the flood insurance study mentioned earlier. It indicates the degree of flood hazard in the special flood hazard area, and actuarial rates are based on this.
As stated, only limited amounts of coverage are available. For building coverage: single-family dwelling or two-to four-family dwelling, $35,000 ($50,000 in Hawaii, Alaska, U.S. Virgin Islands, and Guam); other residential, $100,000 ($150,000 in Hawaii, Alaska, U.S. Virgin Islands, and Guam); non-residential, $100,000 ($150,000 in Hawaii, Alaska, U.S. Virgin Islands, and Guam). For contents coverage (per unit): residential, $10,000; non-residential, $100,000.
Once FEMA has completed the flood study, which is aimed at developing technical information, including minimum first floor elevations for land use purposes, the results are given to the community. The community has 90 days in which to appeal the elevation figures established by FEMA. During this period, flood insurance at subsidized rates remains available under the Emergency Program. Once a final determination on flood elevation is made and accepted, FEMA publishes the FIRM for determining actuarial rates. When the map is published, the community is converted to the regular program and additional insurance is available.
The amounts of insurance available for building coverage are: single-family or two- to four-family dwelling, $50,000 base plus an additional $200,000 for a $250,000 maximum; other residential, $150,000 base plus an additional $100,000 for a $250,000 maximum; nonresidential, $150,000 plus an additional $350,000 for a $500,000 maximum. The amounts of insurance available for contents coverage are: residential, $20,000 base plus an additional $80,000 for a $100,000 maximum; non-residential, $130,000 plus an additional $370,000 for a maximum of $500,000.
Rating a flood policy under the Emergency Program is merely a matter of multiplying the separate amounts of insurance for a building and contents times the appropriate building and contents rates. The current Emergency Program rates (per $100 of insurance) for residential buildings and contents are, respectively, .76 and .96; for non-residential property the rates are .83 building and 1.62 contents.
Rating under the regular program is more complex. If a community is in the regular program, rates depend on the building's qualification as "Pre-FIRM" or "Post-FIRM" construction. Pre-FIRM construction is defined as construction or substantial improvement that started on or before December 31, 1974, or before the effective date of the initial FIRM of the community, whichever is later. Post-FIRM construction is that which started after December 31, 1974, or on or after the effective date of the community's initial FIRM, whichever is later. Separate tables in the flood insurance manual provide rates for each type of construction.
A federal policy fee of $30 is added ($11 for a preferred risk policy; see following section). Again, this fee is different for the RCBAP and is based on the number of units. Increased cost of compliance (ICC), or coverage for the consequential loss brought on by a flood plain management ordinance or law affecting the repair and reconstruction of a flood-damaged structure, is now mandatory on all flood policies except for those in the Emergency Program or those insuring contents only. The limit of liability is $30,000 per building, with a premium not to exceed $75. Payment of the full policy premium must be made at the time of application or renewal, unless the application is submitted for rating.
When a community does not comply with NFIP floodplain management as determined by FEMA, a $50 probation surcharge is applied to all policies, including preferred risk policies, issued on or after the probation surcharge effective date.
The preferred risk policy (PRP) is a package policy offering coverage combinations for both building and contents at a fixed premium. Previously, it was available only to owners of one- to four-family residential buildings located in B, C, and X flood zones. Now, for new or renewal business written on or after May 1, 2004, the PRP can be used for combined building/contents coverage for nonresidential properties, and contents-only coverage for all occupancies. The building must be in a B, C, or X flood zone on the effective date of the policy and must qualify at each renewal (the policy term is one year).
The maximum one- to four-family residential coverage combination is $250,000 building and $100,000 contents. Up to $100,000 contents-only coverage is the limit for other residential properties. Non-residential maximums are $500,000 building and $500,000 contents.
This policy is not available in the Emergency Program or in special flood hazard areas. Condominium units, except for townhouse or rowhouse type buildings insured under the unit owner's name, detached, single-family dwelling insured under the unit owner's name, or contents-only coverage for tenants occupying one of these, are ineligible (however, increased cost of compliance coverage is not available for townhouse or rowhouse condominium units). Contents-only coverage is not available for contents located in basements.
Replacement cost coverage applies if the building is the principal residence of the insured and the building coverage is at least 80 percent of the replacement cost of the building at the time of the loss, or the maximum coverage available under the NFIP.
PRP eligibility is based on flood loss history. A dwelling is ineligible if there are: two loss payments, each more than $1,000; three or more loss payments, regardless of amount; two federal disaster relief payments, each more than $1,000; three Federal disaster relief payments, regardless of amount; or one flood insurance claim payment and one flood disaster relief payment (including loans and grants), each more than $1,000. If, during a policy term, a risk fails to meet the eligibility requirements, it will be ineligible for the PRP and must be non-renewed or rewritten in the standard flood program.
Rates for the PRP are substantially lower than those in the standard program. The federal policy fee ($22) and increased cost of compliance ($1; deduct where property is not eligible for the coverage) are included in the premium, but not the $50 probation surcharge. Check the flood insurance manual for complete rates.
On September 27th, 2007, the U.S. House of Representatives passed the Flood Insurance Reform and Modernization Act of 2007, H.R. 3121. The bill reauthorized the NFIP for five years, through FY 2013. The current authorization for NFIP expires on September 30, 2008. The bill also provides for reforms to the NFIP, improves flood mapping, and expands the NFIP to provide for multiple peril coverage.
In an effort to make the NFIP more actuarially sound, the bill phases out subsidized rates on commercial properties, vacation homes, and second homes built before 1974. Multifamily rental properties are excluded from the phase-out of the subsidy.
The bill also adds additional optional policy coverage, allowing business owners to purchase business interruption coverage at actuarial rates. Additionally, optional coverage at actuarial rates for basement improvements and replacement cost of contents was added. The bill also updated maximum insurance coverage limits for residential and nonresidential properties for the first time since 1994.
Provisions protecting policyholders include clarification of disclosures about flood insurance availability and plain language information on flood insurance policies. Landlords must notify tenants of contents coverage availability. Further, the bill makes flood insurance effective immediately upon purchase of a home.
To encourage participation in the NFIP, the bill provided for a new community outreach program, and provides for a study of how to increase participation by low-income families. In order to help ensure that those homeowners who should have flood insurance do have flood insurance, the bill increased the fines on lenders who do not enforce the mandatory flood insurance policy purchase requirement for those who live in a floodplain and hold a federally-backed mortgage.
The bill also requires FEMA to report to Congress annually on the financial status of the NFIP, increases the amount FEMA can raise policy rates in any given year from 10 percent to 15 percent, authorizes funding for additional staff at FEMA to carry out the requirements of the bill and requires FEMA to review the nation's flood maps and makes the updating of maps an ongoing process.
Finally, the bill includes provisions to expand the Flood Insurance Program to provide for an optional multiple peril policy to allow property owners to purchase wind and flood coverage in a single policy. A homeowner or business in a flood plain would have to sign up for flood coverage to obtain the wind coverage. Wind coverage would not be available separately. The bill requires premiums for the new optional coverage to be risk-based and actuarially sound, so that the program would be required to collect enough premiums to pay claims. Under the bill, multiple peril policies would be available where local governments agree to adopt and enforce building codes and standards designed to minimize wind damage, in addition to the existing flood program requirements for flood plain management.
The Biggert-Waters Flood Insurance Reform Act of 2012 required the NFIP to update floodplain maps, strengthen building code enforcement, remove discounts for insurance on certain properties and move toward actuarially sound rates. Subsidized rates for secondary or non-primary homes were being phased out, and other subsidized rates were to start being phased out in 2013. This caused many homeowners to raise issue with the bill fearing that coverage would be priced beyond their reach.
In large part as a result of the complaints over the rise in rates caused by Biggert-Waters, in 2014 the Homeowner Flood Insurance Affordability Act (HFIAA) was passed. This slowed or halted a significant number of the price increases started by Biggert-Waters. Grandfathered rates were restored, premium increases were limited to eighteen percent with some exceptions, and specified properties were to get an increase of at least five percent of the average rates. Properties newly mapped into a SFHA would have rates set at the preferred risk premium with increases between 5-15 percent at renewal, with an 18 percent cap. Annual surcharges of $25 for primary residences and $250 for non-residential and non-primary residences would be put in force. These surcharges would be placed into a reserve fund, and once premium rates match projected losses the assessments would be terminated. FEMA was also allowed to obtain reinsurance, a monthly installment plan for premium payments was created, optional deductibles of $10,000 became available for insureds, FEMA was to consider flood mitigation actions that an owner had undertaken, an exception for flood-proofed basements was codified, guidelines for flood mitigation methods were created, non-structural flood mitigation features such as marshlands and trees were to be taken into consideration for the establishment of premiums, and FEMA was to monitor the impact of rate increases on small businesses, non-profits, houses of worship and homes with values equal to or less than 25 percent of the median home value of the state.
The NFIP is set to expire September 30, 2017. The National Association of Insurance Commissioners (NAIC) has sent a letter to the speakers of the house and the senate urging long-term reauthorization in order to avoid disruption in insurance, housing, and commercial lending markets. Various recommendations are made including support of Flood Insurance Market Parity and Modernization Act (H.R. 1422/S. 563) introduced by Representatives Ross and Castor and Senators Heller and Tester. This bill clarifies regulators' over private flood insurance and provides a clear definition of private flood in order to clarify language and prompt more insurers to enter the private flood market if they are willing. Additional private carriers in the market would provide consumers with more access and options to flood insurance. This additional coverage would help lessen the strain on taxpayers to fund NFIP.
They also recommend reauthorizing FEMA and reinstating rules to allow policyholders to cancel their flood policies mid-term if they replace coverage with private flood policies. They would receive a pro-rated refund of unused premium.
Increased mitigation efforts are supported and encouraged as floods will continue to be an issue. Mitigation can prevent and lessen losses, and premium discounts on insurance for those who have taken steps to mitigate, retrofit or rebuild property to better withstand floods are supported. Accurate flood mapping is necessary for accurate rates, and increased transparency from FEMA regarding decisions as to how maps are developed is a step towards increased policyholders' understanding of their true flood risk.
Senators Cassidy and Gilibrand have released draft legislation to reauthorize NFIP for ten years. It is the Flood Insurance Affordability & Sustainability Act of 2017. The act includes steps to improve financing, provide premium assistance, encourage private market access, improve mapping techniques and accuracy, increase accountability of NFIP contractors, increase accountability of engineering and litigation costs to ensure costs are billed appropriately, simplify the claims appeal process, ensure that earth movement will not be used as an exclusion when such movement is caused by flood, and other actions. A summary can be found here: https://www.cassidy.senate.gov/imo/media/doc/Cassidy-Gillibrand%20Section%20Summary%204_25_17_%20FINAL.pdf
Meanwhile Senator Kennedy is filing a bill that will give FEMA power to fire engineers and other consultants if they mishandle insurance claims under NFIP. This bill was prompted by consultants who were criticized in the handling of Hurricane Sandy claims continuing to handle later claims from different flooding in Louisiana. Under this bill FEMA would be allowed to establish rules for removing consultants, as well as an appeals process for consultants accused of wrongdoing. Because of an episode of "60 Minutes" in which engineering reports were questions, thousands of Hurricane Sandy claims were reopened by FEMA.
In April the Government Accounting Office (GAO) released a report encouraging comprehensive reform of NFIP in order to make it solvent. One of the biggest challenges is keeping coverage affordable while maintaining solvency, almost an impossible task as actuarially sound rates are very expensive in the most vulnerable areas. The report recommends action in six areas. These areas are outstanding debt, premium rates, affordability, consumer participation, flood resilience efforts and other barriers to private-sector involvement. The report acknowledges that there are challenges inherent in these reforms, some which for a time could increase costs for the government, private sector or property owners. However, addressing the issues identified in the six areas presents the best opportunity to address the current issues with NFIP. The full report can be found here: http://www.gao.gov/assets/690/684354.pdf
In the 2007 case Studio Frames Ltd. v. Standard Fire Ins. Co., 483 F.3d 239 (C.A.4 (N.C.)), an insured business tenant brought a breach of contract action against its WYO insurer that issues its SFIP pursuant to the NFIP. The insurer contended that the summary judgment awarded to the insured should be reversed, because the SFIP did not provide a tenant with building coverage for leaseholds improvements, and the building coverage portion of the insured's policy was void because the statutory limit on coverage applied to each structure and was exhausted by the owner's prior SFIP on the building.
The court of appeals affirmed the district court's granting of summary judgment to the insured, holding that the building portion of the tenant's SFIP protected the tenant's insurable interest in the building to the extent of the leasehold improvements it had made with its own funds, unless the tenant was prohibited from acquiring such coverage under the terms of a policy or by government statute. The court explained that under federal common law, the federal courts draw upon standard principles of insurance law to resolve disputes over coverage in an SFIP. And, if the disputed language in an SFIP is ambiguous, or susceptible to different constructions, the construction most favorable to the insured applied.
The court found that the policy terms did not prohibit the insurer from obtaining building coverage for its leasehold improvements, and the policy provision barring duplicate policies on "property" did not prohibit multiple policies on a single piece of property so long as the policies covered distinct property interests. In addition, the $500,000 statutory cap on structure coverage was per policyholder cap, thus it did not prohibit the insured's coverage by reason of the owner's coverage in the amount of the cap.
A year earlier, in State v. All Property & Casualty Insurance Carriers, 937 So. 2d 313 (La. 2006), the Supreme Court of Louisiana upheld a retroactive extension of the prescriptive period for filing insurance claims relating to Hurricanes Katrina and Rita against a Contracts Clause challenge. After the Louisiana Legislature passed two acts that together extended the prescriptive period for claims arising out of Hurricanes Katrina and Rita for an additional year, the Attorney General sought a declaratory judgment finding the Acts constitutional and petitioned the Supreme Court of Louisiana for certiorari. The court granted the writ and remanded the case to the state district court for an expedited hearing. After the district court found the Acts constitutional, the Attorney General requested immediate review, which the Louisiana Supreme Court granted. The court unanimously affirmed the judgment of the state district court, construing the Acts to apply retroactively, and then found them to be substantive in nature.
The court held that the statutes did not violate state or federal contract clauses, as state law had traditionally regulated insurance as a matter of public policy, the extensions were based upon significant and legitimate public purpose, the state was not providing a benefit to a special interest, and its ownership of insured property damaged by the hurricanes was incidental to the scope of the matter at issue.
The court also found that the retroactive application did not violate due process and the Attorney General was authorized to file the action. Further, the court explained that the statute made no attempt to regulate the federally-regulated NFIP and did not violate the Supremacy Clause. The terms "flood insurance policy" could be read to reference types of flood insurance other than the federally-regulated flood insurance program, and for any type of flood insurance other than the federally-regulated flood insurance, the Legislature provided an exception to the running of the prescription for these types of insurance which are subject to state regulation.
The district court of Maryland examined a different situation in Howell v. State Farm Ins. Companies, 448 F. Supp 2d 676 (2006). Here, the insured brought a proposed class action against multiple private WYO flood insurers participating in the NFIP program, alleging breach of contract, breach of implied covenant of good faith and fair dealing, and breach of fiduciary duty, in connection with their settlements for amounts below the limits of the flood insurance policies. The insurers moved for summary judgment, which the court granted. The court held that the insureds and not the WYO insurers or their adjusters, were responsible under SFIPs with submitting proofs of loss. Thus, the insureds could not seek to recover additional benefits above amounts on proofs of loss but within their policy limits on the basis that they complied with their obligations by cooperation with adjusters and that insurers of their adjusters were chargeable with failure to include all loss in proofs of loss. Additionally, a government bulletin alerting hurricane victims that they could resubmit their claims under the WYO SFIPs for further review did not affect the express waiver of proof of loss requirements, and the insurers did not materially breach SFIP policies.
Finally, the court determined that the SFIPs did not contain an implied covenant of good faith and fair dealing that could excuse the insureds' noncompliance with proof of loss requirements, and insurers were not estopped from raising proof of loss requirements as a defense. The insureds were not victims of duress that could render the proof of loss provisions unenforceable and the insurers proof of loss requirements did not violate the insured's right to judicial review.
Hurricane Sandy swept up the east coast in the fall of 2012 and was the second-costliest hurricane on record. More than 1,000 suits were filed regarding denial of claims for coverage. In Raimey v. Wright National Flood Insurance Co. 76 F.Supp.3d 452 (N.Y. 2014) the insured's sued after mediation failed, and the insured's alleged violation of the court's discovery orders with respect to production of reports by an engineering firm retained by the insurance company. The court imposed sanctions on the carrier and its counsel. The insurer appealed under In re Hurricane Sandy Cases, 303 F.R.D. 17 (E.D.N.Y.).The appeals court upheld the original court's position and that the judge was correct in applying sanctions as original documents were withheld or altered.
Flooding is a global issue and will only get worse over time. Sea levels are continually rising, putting more areas at risk. In trying to keep rates affordable the NFIP has ended up in extreme debt, because affordable rates are not actuarially sound enough to cover the losses. Reforms are proposed and definitely needed in order to establish solvency and make insurance more available to those at risk.
Another issue is that plenty of homeowners do not understand the risk they are taking; unless they have a mortgage they do not have to have a flood policy, and many underestimate the cost of removing and replacing drywall and flooring when a flood occurs, and that the flood premiums are actually affordable when looked at compared making all repairs out of pocket. Aside from reforms of the flood program people need to understand the actual risks present for their properties. This is an enormous challenge.
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